Great job outlining this in plain English! On the policy side, my understanding is the tax advantage in the US for selling to employees (1042 rollover) only applies to ESOP's which are a bit clunkier and more expensive to administer, so this defacto targets larger companies than can absorb that cost. EOT's are lighter weight and make more sense for smaller companies, so we need to extend the 1042 rollover to EOT's and other forms of employee ownership!
As I understand it, ESOPs only make sense when you have more than 30 employees (largely because of the transaction costs which are about the same as selling to a traditional company, but would be too steep for smaller companies). EOTs are definitely lighter weight and easier for smaller companies!
Really appreciate this post and the mention of our recent report about investing in Employee Ownership! This is a great, clear, summary of some of the needs and tensions in the field. Thanks!
At Transform Finance, this work sits within our broader Alternative Ownership program which focuses on encouraging the adoption of corporate structures that share wealth and control with a company's stakeholders, not just its shareholders. In short, employee ownership is fabulous and it's also interesting to think about ownership being shared with customers, suppliers, community members or even with nature. I'm curious whether you've looked into those models such as purpose trusts, or granting nature a seat on corporate boards, etc. Those are interesting models when thinking about how capitalism could evolve. What do you think?
Yes! I am so interested in your Alternative Ownership program. And especially the idea of sharing ownership with nature—I'm working on a series about this now, have you seen that done anywhere? (Apart from Patagonia?)
I've thought a lot about the other ideas as well—for example, I would love to make my readers owners in my newsletter, and to earn a share of the dividends each year as my subscribership grows. Unfortunately, there's no good tech that can help me achieve it at the moment.
I also heard Ecosia has a similar set-up but I haven't looked into it further yet.
Those are all European companies...
In the US, perpetual purpose trust companies have also been set-up to support a range of different purposes and stakeholders such as Organically Grown Company, Berrett-Koehler, Firebrand Artisan Breads, Natural Investments and even Hobby Lobby. I don't know exactly which include nature as a purpose and/or stakeholders but a near complete list of PPTs/EOTs is here: https://dataverse.harvard.edu/file.xhtml?fileId=7120837&version=3.0.
Love to hear you're thinking about shared ownership for your newsletter. Patreon is probably the closest platform (where people could support, and get a reward down the line) but agree it's not quite set-up for this use case. The folks at RadicalXChange have been thinking about Partial Common Ownership as a way for artists/creators to share ownership of their work with contributors and community members: https://www.radicalxchange.org/wiki/pco-art/. Not a tech platform yet but the theoretical underpinning for it.
Such a wonderful article! Thank you for researching and summarizing all this information! I really think employee-owned (and I'm a big fan of employee-run part as well) companies are the key to making capitalism work for everyone.
Happy to read that selling to employees has become a lot easier in the UK! I'm working on a TV series that's partly inspired by British IT pioneer Steve Shirley who sold her company to her (mostly female) employees. In her memoir she writes at length how complicated it was to set this up even though it was very clearly the right thing to do as she was acutely aware that she wouldn't be the owner of a successful company without the people working for her. However, she persisted and this made many women very wealthy when the company floated.
Your post has a classic tunnel vision error. Just focusing on CO2 emmissions. However there are other factors that degrowth is trying to fix... food waste, toxicity, inequality, poverty, water crisis, health, overconsumption, food security... you know I could continue. Also true that data centres can be powered by 100% renewable energy... but intangible assets do have a high carbon footprint associated with indirect emissions. Specially in the race for AI this will be a major contributor. In a sense I still do not get your point of why degrowth is not the answer... you are just arguing that there are other ways to grow the economy without killing the planet with little evidence on the specifics of why this is the case... anyway just a thought...
My article doesn't focus on CO2 emissions, it's focused on using the earth's resources. My work as a whole focuses a lot on how we can solve the other things on your list: food waste and security, wellbeing, and inequality and poverty (this post as an example of those last two). I just don't think a stagnating market is how we achieve that. You might be interested in the next two articles in this series for more specifics:
I founded one of the investment funds focused on EO conversion you mentioned (SmallCapital.org) and this is one of the best summaries of the rationale and path forward I have read. Thank you!
We do equity+debt. SmallCapital puts a de-risking equity investment to enable the bank debt to finance the majority of the transition. Our focus is on small businesses that are being overlooked
So inspiring, thank you for writing this. This kind of structure gives me hope that we can transition to more just and equitable economics without the threat of war and collapse that would be far more painful to reach the goal of shared wealth. Filing away for my utopian novel idea!
It's very difficult to sell a dying company, and I don't think it's feasible to sell a dying company to employees. The financials have to be good for the transaction to even work!
I sold my company as an ESOP. It was kind of a pain in the ass. I think every employee should get a share of profits by default. It would shift the redistribution of wealth to happen at the source of wealth creation. The systems we have in place (in the US, at least) are far too complicated and costly to make it realistic for many smaller to mid-size companies to pull it off. Simplification (and a tax break!) would accelerate adaptation for sure.
It really should be much easier. The reason I haven't gone as far as to say that every employee should get a share of profits by default is that it might not be financially feasible for a company to do so until they are a bit larger. Maybe even large enough to be profitable enough to sell, at which point you can exit to employees? I'm not sure how that would work with smaller companies who aren't yet profitable? But I really love your idea and I want to think this through more.
You are correct, it wouldn't really work until a business reached a certain level of profitability. I would argue that labor would naturally become more productive if it were incentivised by profit sharing. Also, once the company became large enough, the mechanism of employee ownership is already established. The owner or "majority holder", as it were, could sell to the employees or an outside investor - the third party having a full understanding of what they're getting into.
And, this type of accounting wouldn't prohibit a public offering. It just that profits would be shared with labor.
Well, this is encouraging 👏 Let’s do more of this in the USA.
Great job outlining this in plain English! On the policy side, my understanding is the tax advantage in the US for selling to employees (1042 rollover) only applies to ESOP's which are a bit clunkier and more expensive to administer, so this defacto targets larger companies than can absorb that cost. EOT's are lighter weight and make more sense for smaller companies, so we need to extend the 1042 rollover to EOT's and other forms of employee ownership!
As I understand it, ESOPs only make sense when you have more than 30 employees (largely because of the transaction costs which are about the same as selling to a traditional company, but would be too steep for smaller companies). EOTs are definitely lighter weight and easier for smaller companies!
Really appreciate this post and the mention of our recent report about investing in Employee Ownership! This is a great, clear, summary of some of the needs and tensions in the field. Thanks!
At Transform Finance, this work sits within our broader Alternative Ownership program which focuses on encouraging the adoption of corporate structures that share wealth and control with a company's stakeholders, not just its shareholders. In short, employee ownership is fabulous and it's also interesting to think about ownership being shared with customers, suppliers, community members or even with nature. I'm curious whether you've looked into those models such as purpose trusts, or granting nature a seat on corporate boards, etc. Those are interesting models when thinking about how capitalism could evolve. What do you think?
Yes! I am so interested in your Alternative Ownership program. And especially the idea of sharing ownership with nature—I'm working on a series about this now, have you seen that done anywhere? (Apart from Patagonia?)
I've thought a lot about the other ideas as well—for example, I would love to make my readers owners in my newsletter, and to earn a share of the dividends each year as my subscribership grows. Unfortunately, there's no good tech that can help me achieve it at the moment.
Excited to hear you're working on a series on this topic!
Faith in Nature, Insta Drive & House of Hackney have added nature to Board of Directors. This article is helpful: https://www.stevens-bolton.com/site/insights/articles/appointing-nature-to-the-board-storm-in-a-teacup
I also heard Ecosia has a similar set-up but I haven't looked into it further yet.
Those are all European companies...
In the US, perpetual purpose trust companies have also been set-up to support a range of different purposes and stakeholders such as Organically Grown Company, Berrett-Koehler, Firebrand Artisan Breads, Natural Investments and even Hobby Lobby. I don't know exactly which include nature as a purpose and/or stakeholders but a near complete list of PPTs/EOTs is here: https://dataverse.harvard.edu/file.xhtml?fileId=7120837&version=3.0.
Love to hear you're thinking about shared ownership for your newsletter. Patreon is probably the closest platform (where people could support, and get a reward down the line) but agree it's not quite set-up for this use case. The folks at RadicalXChange have been thinking about Partial Common Ownership as a way for artists/creators to share ownership of their work with contributors and community members: https://www.radicalxchange.org/wiki/pco-art/. Not a tech platform yet but the theoretical underpinning for it.
These are amazing resources, thank you so much! Adding them all to my research notes now.....
Silicon Valley is a place of compensation innovation first and technological innovated second.
The proposal from Marco Rubio is a great patch on a very complicated process.
Hope the UK can leapfrog here.
Such a wonderful article! Thank you for researching and summarizing all this information! I really think employee-owned (and I'm a big fan of employee-run part as well) companies are the key to making capitalism work for everyone.
Me too!
Happy to read that selling to employees has become a lot easier in the UK! I'm working on a TV series that's partly inspired by British IT pioneer Steve Shirley who sold her company to her (mostly female) employees. In her memoir she writes at length how complicated it was to set this up even though it was very clearly the right thing to do as she was acutely aware that she wouldn't be the owner of a successful company without the people working for her. However, she persisted and this made many women very wealthy when the company floated.
Degrowth is the answer!
I tend to disagree. https://www.elysian.press/p/we-dont-need-degrowth-for-the-environment
Your post has a classic tunnel vision error. Just focusing on CO2 emmissions. However there are other factors that degrowth is trying to fix... food waste, toxicity, inequality, poverty, water crisis, health, overconsumption, food security... you know I could continue. Also true that data centres can be powered by 100% renewable energy... but intangible assets do have a high carbon footprint associated with indirect emissions. Specially in the race for AI this will be a major contributor. In a sense I still do not get your point of why degrowth is not the answer... you are just arguing that there are other ways to grow the economy without killing the planet with little evidence on the specifics of why this is the case... anyway just a thought...
My article doesn't focus on CO2 emissions, it's focused on using the earth's resources. My work as a whole focuses a lot on how we can solve the other things on your list: food waste and security, wellbeing, and inequality and poverty (this post as an example of those last two). I just don't think a stagnating market is how we achieve that. You might be interested in the next two articles in this series for more specifics:
https://www.elysian.press/p/we-need-to-grow-the-economy-to-advance
https://www.elysian.press/p/the-ideal-economy-in-2100
I founded one of the investment funds focused on EO conversion you mentioned (SmallCapital.org) and this is one of the best summaries of the rationale and path forward I have read. Thank you!
Amazing!!!!! I'm curious: have you seen any equity deals yet? Or primarily debt deals?
We do equity+debt. SmallCapital puts a de-risking equity investment to enable the bank debt to finance the majority of the transition. Our focus is on small businesses that are being overlooked
Amazing, I might hit you up for a future piece…
Would love that!
Not my utopian dream, but a cool concept regardless. Thank you for sharing!
I’d also recommend studying Finnish cooperatives, Ryan Cooper has a good article on one of them https://prospect.org/world/2023-10-11-cooperative-that-could-s-group-finland/
Thank you!
So inspiring, thank you for writing this. This kind of structure gives me hope that we can transition to more just and equitable economics without the threat of war and collapse that would be far more painful to reach the goal of shared wealth. Filing away for my utopian novel idea!
I have the same hope. 🥰
ultimately, if owners divest themselves of dying companies (not those listed here) is it not divesting their losses to the employees?
It's very difficult to sell a dying company, and I don't think it's feasible to sell a dying company to employees. The financials have to be good for the transaction to even work!
Excellent piece! Clearly, the Gov entities need to broadcast this more. It's simply not known.
A great opportunity for wealth distribution and creation and a deft move against monopolies and Private Equity greed.
Fantastic, it might happen in Australia in about 1000 years time
I agree this is good but ignores the elephant in the room which is the debt based economy
Have you seen any interesting solutions there?
I sold my company as an ESOP. It was kind of a pain in the ass. I think every employee should get a share of profits by default. It would shift the redistribution of wealth to happen at the source of wealth creation. The systems we have in place (in the US, at least) are far too complicated and costly to make it realistic for many smaller to mid-size companies to pull it off. Simplification (and a tax break!) would accelerate adaptation for sure.
https://danstocke.substack.com/p/fixing-capitalism-through-gaap
It really should be much easier. The reason I haven't gone as far as to say that every employee should get a share of profits by default is that it might not be financially feasible for a company to do so until they are a bit larger. Maybe even large enough to be profitable enough to sell, at which point you can exit to employees? I'm not sure how that would work with smaller companies who aren't yet profitable? But I really love your idea and I want to think this through more.
You are correct, it wouldn't really work until a business reached a certain level of profitability. I would argue that labor would naturally become more productive if it were incentivised by profit sharing. Also, once the company became large enough, the mechanism of employee ownership is already established. The owner or "majority holder", as it were, could sell to the employees or an outside investor - the third party having a full understanding of what they're getting into.
And, this type of accounting wouldn't prohibit a public offering. It just that profits would be shared with labor.
Yes, that could be. It's definitely an interesting approach!
FYI: I shared your article with mnceo.org, an organization advocating for employee ownership in my home state of Minnesota.